Interpretive Summary: A market for greenhouse gases, such as the one being proposed in the Waxman-Markey Bill, could provide an incentive to reduce nitrous oxide emissions from cropland. Our findings suggest that not all farms will benefit from a market for N2O reductions. Those already meeting rate, timing, and method criteria for good nitrogen management, and those meeting rate and method criteria, cannot make any improvements to nitrogen management that reduce N2O without increasing total nitrogen emissions, except by reducing application rate below the recommended rate or by switching to crops that uses less nitrogen. Over 40 percent of corn acres fit in these categories. However, to reduce nitrogen application rates below recommended levels would not make economic sense unless the credit price was much higher than the $15 per ton CO2 equivalent we assumed.

Technical Abstract:
Whether a greenhouse gas cap-and-trade program is implemented is questionable at this time. However, our findings are also relevant for any program that pays farmers to reduce nitrous oxide emissions. Our findings also point out the importance of considering the entire nitrogen cycle when targeting one particular nitrogen compound. Altering management practices to reduce N2O emissions could increase the loss of NO3 to water resources, through increased leaching to groundwater and sub-surface flow to surface water. In regions trying to deal with nutrient enrichment to water resources, increased nitrate losses would not be welcome. A trading program could address this problem by restricting the types of practices that could be used to reduce N2O emissions. Based on our findings, reduced application rates provide the best opportunity to reduce N2O emissions and NO3 losses.